Loan Participations Are Focus of Trade Group

Coming from the banking industry with nearly 30 years of experience, Terry McHugh said it never ceases to amaze him on just how different credit unions are.

“The one thing that always blows me away is collaboration,” said McHugh, president/CEO of Commercial Alliance, a business lending CUSO in Troy, Mich., who has been working in the credit union industry for eight years.

McHugh was one of 15 CUSO executives attending the Regional CUSO Alliance meeting earlier this month in Ann Arbor, Mich.

Formed in 2009, the RCA’s mission is to collaborate in business lending by leveraging local knowledge and shared expertise to promote sound lending practices to credit unions in the communities they serve, particularly the local loan originations. Together, the CUSOs that belong to the alliance serve nearly 500 credit unions and more than $3 billion in commercial lending assets.

The group reviewed and reaffirmed its mission and discussed the concerns presented by large credit unions and CUSOs originating loans across a national platform and those that engage in activities that are highly concentrated in specialty industries.

Among its tenets are that a well-balanced and diversified member business lending portfolio is built upon an understanding of local geographic factors, specific industry risks, product types and underwriting criteria.

For McHugh, being able to sit together and share best practices with his peers is always a discussion he looks forward to.

“While all of our models are not the same, the same thing, we always fall back on is all participations are not all bad,” McHugh. “With the participation model, we keep it localized.”

Members of the RCA discussed the recent NCUA proposal to limit loan participations and agreed that the regulator’s concerns related to systemic risk associated with loan participations are mitigated by developing strong origination and due diligence processes within credit unions and also by targeted marketing efforts to a credit union’s existing field of membership.

The RCA said loan participations are a critical factor among most regional credit unions and serve as a tool to diversify and mitigate concentration risk.

However, what the NCUA is proposing would threaten the viability of several of the CUSOs and prevent some of their credit unions from continuing their current lending programs, according to the RCA. The group agreed that the lack of understanding of the regional CUSO participation model is one of the most significant threats facing the CUSOs.

One of the highlights of the RCA’s meeting was the presence of officials from the NCUA who spoke on the agency’s CUSO and loan participation proposals as well as best practice information underwriting content, process and risk management protocols.

“I found the NCUA to be very engaged in outreach and listening, particularly as it relates to the two pending rules,” said Bill Beardsley, president of the Michigan Business Connection, a commercial lending CUSO in Ann Arbor and a RCA member. “I’ve been very pleased with their interest in understanding how this could hurt CUSOs.”

This is not the first time the NCUA has attended RCA’s meeting. Beardsley said officials attended the group’s gathering last year in Portland, Maine.

Representatives with the National Association of Credit Union Supervisors were also at the RCA’s this month’s meeting. The NASCUS discussion focused on the importance of the CUSOs making sure the credit unions they serve understand and manage the risks of their lending activities, regardless of the services provided by the CUSO.

The exchange created a commitment to share resources related to credit union training and education. Enhanced collaboration between the CUSOs will provide effective results for their credit unions and improved interactions with members and regulators.

McHugh said one critical piece of a loan participation is to know the policies and financial performance of the credit unions that are involved in the transaction. Commercial Alliance has 21 credit union partners with a total of $200 million in outstanding loans. Nearly 45% of them are loan participations, he noted, adding not all are $30 million deals–some are as small as $500,000.

“It’s important to be able to get in a car and drive out to kick the tires and know what the collateral is,” McHugh said.

Beardsley said another take away from the meeting was sparked by the NCUA reminding credit unions to understand and manage the risks of business lending. The CUSO reps shared their individual stories on training initiatives to ensure that credit union staff, executives and boards are all on the same page.

With all the recent headlines on the conservatorship of Telesis Community Credit Union and others that ran into financial troubles due to soured business lending activities, Beardsley wanted to emphasize some differences.

“We have to be careful to distinguish between credit unions that get into trouble and CUSOs,” he explained. “Concern for their CUSOs was a topic of discussion. It goes to the core reason why [RCA] was formed–to make sure the industry knows CUSOs serve credit unions in all shapes and sizes.”

Beardsley made the point to note the smaller CUSOs that are collaborating on the ground level can be recognized for the work they do in competing with larger CUSOs.